Ten Frequently Asked Questions about the Regulatory Flexibility Act

The following questions repeatedly arise during RFA training. They address some of the more challenging parts of rule analysis, as well as areas that are commonly misunderstood. Many continue to pose problems for agency regulators. In the following article, Acting Deputy Chief Counsel Claudia Rodgers answers them. The list first appeared in the May 2004 issue of The Small Business Advocate.

1. What is the difference between direct and indirect impact?

A regulation imposes a direct impact on a business it regulates. Those compliance costs associated with the rule are an example of direct economic impacts of the rule on those businesses. However, a regulation may also have an economic impact on businesses that are not subject to the rule and its requirements. As a result of the regulation, those other businesses may also incur costs. For example, a rule that regulates car manufacturers may indirectly affect car rental agencies which must purchase those cars for use in their business.

Courts have held that the RFA requires an agency to perform a regulatory flexibility analysis of small enitity impacts only when a rule directly regulates them. This issue was first decided in Mid-Tex Electric Cooperative, Inc., v. Federal Energy Regulatory Commission (FERC)J In that case, FERC stated that "the RFA does not require the Commission to consider the effect of this rule, a federal rate standard, on nonjurisdictional entities whose rates are not subject to the rule." The court agreed, reasoning that "Congress did not intend to require that every agency consider every indirect effect that any regulation might have on small businesses in any stratum of the national economy." The court concluded that "an agency may properly certify that no regulatory flexibility analysis is necessary when it determines that the rule will not have a significant economic impact on a substantial number of small entities that are subject to the requirements of the rule." Although Mid-Tex occurred before passage of the Small Business Regulatory Enforcement Fairness Act of 1996, courts have upheld this reasoning since then. The court in Cement Kiln Recycling Coalition v. EPA2 reasoned that "requiring an agency to assess the impact on all of the nation's small businesses possibly affected by a rule would be to convert every rulemaking process into a massive exercise in economic modeling, an approach we have already rejected."

Although it is not required by the RFA, the Office of Advocacy believes that it is good public policy for agencies to include reasonably foreseeable indirect impacts in the regulatory flexibility analysis.

2. Define "substantial number" and "significant economic impact."

An agency's second RFA step in a threshold analysis is to determine whether there is a significant economic impact on a substantial number of small entities. The RFA does not define "significant" or "substantial." In the absence of statutory specificity, what is significant or substantial will vary depending on the problem being addressed, the rule's requirements, and the preliminary assessment of the rule's impact.

The agency is in the best position to gauge the small entity impacts of its regulations. Significance should not be viewed in absolute terms, but should be seen as relative to the size of the business, business profitability, regional economics, and other factors. One measure for determining economic impact is the percentage of revenues or percentage of profits affected. Other measures may be used. For instance, the impact could be significant if the cost of the proposed regulation (a) eliminates more than 10 percent of the businesses' profits; (b) exceeds 1 percent of the gross revenues of the entities in a particular sector, or (c) exceeds 5 percent of the labor costs of the entities in the sector.

The absence of a particularized definition of either "significant" or "substantial" does not mean that Congress left the terms completely ambiguous or open to unreasonable interpretations. …

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